MDRR's Portfolio Recovery From COVID-19 Drives Strong 4Q Results; Maintain BUY Rating, $3 PT


4Q Results: Revenue for 4Q21 was $2.8 million, which beat our $2.7 million estimate and was up 16% year over year from $2.4 million in 4Q20. Average occupancy rate for the Company's seven retail and flex properties increased to 95.2% in 4Q21 compared to 92.8% in the year ago period for MDRR's four retail and flex properties. Meanwhile the Clemson, SC hotel property has had 100% average occupancy rate for the twelve months ended 4Q21 compared to a 47.2% occupancy rate in the prior year period, a significant improvement boosting the bottom line. AFFO in 4Q21 was $420k, an increase of $555k over the prior year period. AFFO per share was $0.03, in line with our estimate.

Portfolio Activity: During 2021 the company's total square feet of retail and industrial properties increased 92% to end the year at 765k square feet. The company made three primary acquisitions during the year including the Lancer Center (retail) in May, Greenbrier Business Center (flex industrial) in August, and the Parkway Property (flex industrial) in November. These acquisitions should help drive AFFO higher in 2022. We anticipate additional acquisitions in 2022 which will further push AFFO higher, in our view. Meanwhile, the company has only two leases expiring in 2022 that represent a total 5.2% of aggregate annual rent, we anticipate these spaces will be re-leased at a higher price.

Share Buyback Program: At year-end the company's board of directors approved a 500k share buyback program. We would expect the company to deploy this program opportunistically over time. In our view, we anticipate MDRR will continue to allocate capital towards the purchase of commercial real estate as its primary use of cash. Subsequent to year end, the company has repurchased 268k shares and we anticipate the company will continue to do so.

Liquidity: At year end the company had $4.4 million of cash and another $3.0 million of restricted cash.

Our Thesis Remains Intact: At current levels, we think the risk/reward on MDRR shares is compelling. MDRR invests in flex industrial and neighborhood center properties, both have held up well during the pandemic and have strong demand which should drive future rent growth. All of the company's properties are once again cash flow positive and it is actively buying commercial properties in secondary markets at attractive cap rates. At the same time, MDRR de-risked with the sale of its Hampton Inn Hotel which was challenged during the COVID-19 induced shut down.

Risks: Risks to attainment of our price target include the impact of future interest rate increases, continued pressure on traditional brick and-mortar retailers from e-commerce, temporary retail store closures in the wake of COVID-19, the impact of reduced travel on the company's hotel properties, and potential dilution to shareholders from future capital raises.

Valuation: We arrive at our $3 price target based on our 2022 NOI estimate of $7.6 million and applying a 7% cap rate to arrive at a fair market value for property assets then we subtract the net debt and divide by the number of shares outstanding. In addition, the current annualized dividend of 7.2% is attractive. Based on the current share price, we see significant upside for investors.

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